Not Much Ado About the ACA

The impact of major legislation in healthcare is observable only with the passage of time. Markets rarely follow the neat contours of the law and there are repercussions often unseen in the heady confidence that accompanies the end of partisan political debate. Eight years out from passage of the 2004 Medicare Modernization Act, which granted a new drug entitlement (Part D) to seniors, what precedents might we apply from this experience to the more sweeping and complex provisions of the Obama Administration's 2010 Affordable Care Act (ACA)? The question is important in defining the future of the pharma industry business model, because this month marks the start of the law's most critical implementation phase, where the states and the federal government begin offering a menu of plans for subsidized health coverage to millions of citizens left out or underinsured in our current system of care.

Will pharmaceutical manufacturers obtain a fresh growth dividend from this promise of expanded access to the uninsured, in much the way that Part D did after that law was fully implemented in 2006? Or is it likely to be a false promise, that paper tiger I call "Not Much Ado...About Something"? Our simple answer: the precedent for a jump in revenues just isn't there; despite its vast scope and frequently contradictory ambitions, the ACA will not amount to much more than "business as usual" for most of big Pharma and its brands.

With the advent of the Part D drug benefit in 2006, the pharmaceutical industry saw a major increase in total branded sales, with IMS Health reporting a doubling of revenue growth rates, from 4.1 percent in 2005 to 8.4 percent. Many brands benefited from the improved revenue and boosted margins as well, when a large bolus of Medicaid patients who were "dually eligible," along with several million indigent patients receiving free product, were moved into Part D as Low Income Subsidy (LIS) patients. However, these gains were followed by increased payer control and concessions to the largest managed care Part D plans, with the result that these plans now extract much higher rebates from manufacturers than commercial plans. The changes are now more or less permanently embedded in the relationship between the industry and payers, which appear to hold the upper hand in pricing negotiations.

Nevertheless, many of our client companies have looked at the expansion of health coverage from ACA and wondered, or perhaps hoped, that there might be a sequel to the 2006 blockbuster scenario in 2014. We believe the odds are stacked against that happening again for the vast majority of pharmaceutical brands.

There are several reasons for this pessimism. For many drug-makers, the greatest impact of the ACA has already taken place. That impact consists of a decline in net margins from manufacturers picking up 50 percent of the cost of drugs for Medicare patients whose expenditures lead them to being placed within the coverage gap or "doughnut hole," where the burden of payment falls back on to them as individual patients. For the average retail product, company margins have declined by eight to 10 percentage points for prescriptions filled by the standard eligible population in Part D. However, depending on the importance of Standard Eligible patients (who can account for as little as 15 percent of a product's Part D volume, or, alternatively, as much as 80 percent), as well as cost of care variations by geographic location, the impact of this subsidy can be many times greater, or it can be negligible. For some specialty products the negative impact can be less still, and the 50 percent subsidy to patients may actually have resulted in increased utilization of covered medicines.

So it goes for the idea of any upside from expanded health coverage under Obamacare. The impact of ACA in 2014 really depends on where a brand ends up this year: with its formulary coverage, the therapeutic class it competes in, and where it has the strongest position geographically in Medicaid and commercial plans.

There are three basic conclusions that we draw from this analysis.

» Volume increases will not be as immediate, nor as significant, as was the case for Part D.

» Growth and margin improvement are contingent and cannot be generalized. Impacts will vary significantly depending on the product and whether it has generic alternatives, the time it has been on the market, and whether co-pay support (as in many specialty products) has become critical to maintaining patient adherence to therapy.

» Any upside, where it does exist, will vary geographically—mostly in the Democratic-leaning "blue states" that have expanded the level of Medicaid coverage in spirit with the Obama administration's approach.

Access: a mixed picture

Figure 1

As depicted in Figure 1, the demographics of the ACA indicate that the offer of expanded health coverage doesn't necessarily imply there will be better drug coverage for all. In contrast to the straightforward objective of the Part D legislation, the ACA has multiple goals and hundreds of moving parts. For some of those previously uninsured, the expansion of Medicaid will certainly provide new prescription coverage. Similarly, the Individual and Small Business Exchanges (SHOP) will mean that patients have access to medicines.

But the real question is how good will their access be to healthcare professionals? For many newly covered patients, the quality of drug coverage will likely exceed the quality—and the commitment—of the network of physicians available to treat them. There is already a crisis in many states with large Medicaid programs in terms of the number of primary care physicians able to make room for new Medicaid patients. In addition, how long will it take a newly covered patient to obtain an appointment with a specialist neurologist, rheumatologist, or gastroenterologist? The daunting numbers threaten to sidetrack the law's goal of improving the standard of care for millions of patients with MS, rheumatoid arthritis, and hepatitis C—each on its own a serious public health threat.

On the downside, ACA may ultimately lead to a diminished quality of drug coverage for many commercial patients who will be "dumped" by their employers from rich, defined benefits to less costly health options operated by third parties. For the industry, a move away from commercial, employer-based coverage to either Medicare Part D plans or the reform law's exchanges will have two major impacts on volume and profit margin. First, Part D and exchange plans are likely to have more bargaining power than most commercial insurers, as they are more willing and able to restrict their formularies to only those manufacturers and products willing to discount heavily and provide "price protection." Second, either of these alternatives will likely preclude the patient from getting co-pay offset support. And high deductibles and co-pays, with no co-pay offset cards allowed, will lead to substantially higher patient abandonment and reduced adherence.

Therapeutic Class: It Depends

Figure 2

As seen in Figure 2, expanded health coverage does not carry the same upside potential for all branded products and therapeutic classes. For some primary care classes, such as pain, depression, and hypertension, where there are multiple generic alternatives, new patient coverage could lead to very limited new branded prescription activity. If the new payers do not block the branded drug entirely, their benefit designs are likely to look like Part D, where there is a dramatic co-pay differential between branded and generic drugs. And even if the branded drugs are contracted to get on preferred (Tier 2) formulary status, many prescribers—be they physicians or physicians assistants—are likely to write "generics first" even when that step is not required. Companies with products in these classes should look to their own experience in Massachusetts in 2007, after the Access to Affordable, Quality, Accountable Health Care Act (now known as "Romneycare") was implemented. Did their brands grow, or did generic share grow faster than in the rest of the country? We have seen this movie already.

For specialty products, which have high annual costs per patient and which are driving drug spending trends among employers, insurers, and PBMs in the commercial channel, manufacturers should anticipate little growth and possibly a decline in volume depending on whether patients are allowed to use co-pay cards to offset large deductibles and monthly out-of-pocket expenses. A drug like Enbrel has achieved very high patient adherence with pay-no-more-than $10 programs (PNMT) for new and continuing patients. Those newly insured patients that do find their way into a specialty physician's office may find themselves facing prohibitively high co-pays that are comparable to Part D's specialty tier (at a $300 per month average). Potential beneficiaries in specialty products will be those that have a physician-administered protocol such as Remicade and Orencia in the rheumatoid arthritis space and can be billed under "medical" reimbursement codes.

Products or product classes that have no real generic or biosimilar alternative today, however, are likely to see a boost from ACA. In the GLP-1s for example, newly insured patients can't be stepped through a generic and if the formulary includes the therapeutic class at all, manufacturers will get their fair share of new patient starts. Products like Victoza may get even more than their fair share, as they are likely to be "must haves" on any exchange formulary. Whether new insurance coverage comes from the exchanges or Medicaid expansion, manufacturers in these classes stand to gain volume, albeit at lower margins. And the newer products or launch products should have reasonable gross margins because they have not yet accumulated significant CPI penalties to add on top of the statutory Medicaid discount.

Geographic split

Implementation of ACA will not be uniform across the country nor will it offer the same opportunities for all products and manufacturers. As of August 2013, about half of the 50 states have opted out of the federally subsidized expansion of Medicaid coverage; most of the politically conservative states have dragged their feet in setting up both the exchanges and the infrastructure to encourage enrollment.

The Democratic Party "blue states" that are encouraging enrollment and expanding Medicaid will follow a very different script. Manufacturers with a history of selling to the Medicaid channel and the large sales forces that still have the ability to call on Medicaid physicians will have the advantage.

And, although the margins in many established branded products will be paper thin due to CPI penalties, pharmaceutical companies can expect a spillover effect in those states that have expanded Medicaid coverage. Building on precedents from the federal WIC (womens, infant, and children) program, physicians will frequently not know a patient's eligibility for Medicaid, and may inappropriately prescribe drugs with preferred formulary status on Medicaid to any and all newly insured patients.

Contraceptives as policy precedent?

So how do we validate this view of muted volume growth, dispersion of opportunity across branded products, and varied geographic upside? Well, ACA is already here in one class—contraceptives, where federal regulations required all commercial insurance plans to implement zero co-pays in January 2013. This action should have produced an across the board "windfall" for all branded contraceptives. However, early results support the "it depends" perspective.

Past is Prologue

Like the state governments with Medicaid expansion, many insurance plans have decided to implement these regulations with their own interpretations—in some cases following the letter of the law, and in others, only the spirit. United Healthcare made only one generic oral contraceptive available at zero co-pay while Harvard Pilgrim (historically one of the most restrictive payers) put every branded pill, patch, and ring on its primary formulary for zero patient out of pocket.

Although it is early, first half results for 2013 show year over year declines in all branded volumes, due to an inexorable shift to generics despite the improvement in patient cost sharing. Patient co-pays for alternate forms of the contraceptive pill—rings and patches—fell most dramatically. However, this varied by payer and geography, with more dramatic generic conversion rates in plans such as United and BCBS of Massachusetts that touted the zero co-pay for generics.

Manufacturers in the contraceptive classes have already seen how ACA's impact will literally be all over the map. They have gained a year's experience in managed care contracting and co-pay card deployment, the results of which turned their previous strategies topsy-turvy. The pregnant question: Who needs co-pay cards in Massachusetts for any contraceptive? Why do you contract for tier?

One thing is for certain—that ACA will accelerate the pace in which pharmaceutical manufacturers move away from a "one-size-fits-all" national model of resource allocation. A state-by-state view of the world which is emerging from differences in Part D and commercial formularies will be necessary to capture any upside that comes from ACA—and to do that without overspending.

Mason Tenaglia is Managing Director of the Amundsen Group and a member of Pharm Exec's Editorial Advisory Board. He can reached at MTenaglia@Amundsengroup.com
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